Texas law promoting life settlements is bad news

A new Texas law that promotes life settlements is “credit negative” for the life insurance industry, says Moody's

A new law that promotes life settlements to pay life healthcare expenses is “credit negative” for the life insurance industry, according to a new report.

Moody’s Investor Service, New York, arrives at this conclusion in “Credit Outlook, a weekly report that examines the credit implications of current events. A section of the June analyses the impact of that encourages the sale of life settlements: the sale of an existing life insurance policy to a third party for more than its contractual cash surrender value, but less than its death benefit.

On June 14, Texas Governor Rick Perry signed into law a bill that lets Texas state Medicaid officials tell policyholders applying for Medicaid assistance that they can sell their contracts to a life settlement company to cover custodial healthcare expenses. Those who do so could receive Medicaidwhen the settlement funds are used up.

“[The law] is credit negative for life insurance companies because the state’s endorsement and potential expansion of life settlements will pressure life insurers’ profitability as life settlements keep in force policies that would otherwise have been surrendered,” Moody’s states in its report. “This will result in life insurers ultimately paying death benefits to investors instead of a much smaller surrender value amount to policyholders.

“With similar bills in seven other states pending, an expansion of life settlements on a large scale would produce fewer lapses and more covered deaths than life insurers originally priced for, hurting their profitability,” the report adds.